With inflation now rising faster than wages, economists are debating which group suffers more from inflation, the poor or the rich. This kind of economy-wide question is quite easy to answer, especially when rates of inflation have been so high in recent times while comparing the losses to the poor to the losses to wealthier groups.
Nonetheless, the arguments suggest that the poor are likely to take a beating. Inflation can worsen inequality or poverty because it hits income and savings harder for poorer or middle-income households than for wealthy household. One major factor being that the poor is the socio-economic group that finds it hardest to purchase a home, of which real estate seems to be one of the best inflation hedges.
In Nigeria for instance, the average Inflation rate in the current Buhari-led administration is at 12.9% this excludes covid-19 effect, with a significant rise of 250bps compared to 10.4% during the Jonathan-led administration. This is according to the Nigerian Bureau of Statistics, NBS. Headline Inflation in Nigeria rose to 20.52% in August 2022, higher than 19.64% recorded in July 2022, this represent the highest inflation rate since 2005. Food Inflation also rose by 110bps to 23.12% from 22.02% in July 2022, while Core Inflation increased by 94bps to 17.20% in August 2022 compared to 16.62% in July.
Nigeria’s inflation rate in the month of August 2022 rose to a 17-year high of 20.52% This compares to 19.64%. recorded in the previous month of July 2022, and it was driven by significant increases in both Food and Core Inflation. According to the NBS, the rise in food inflation was caused by increases in prices of bread and cereals, food products like; potatoes, yam, meat, fish, oil, fat and other tubers. Nigerians have continued to feel the impact of the inflation for instance, a commodity which sold at N1,000 in 2015 is currently sold at N2,000, which is a 100% increase.
Salaries have not been increased to compliment the prices of goods In the market, instead people are left with the option of cutting down their budget while those who can afford relocation troop out in their numbers, thereby contributing to the high demand of foreign currency especially dollar, which in turn devalues the Nigerian Naira.
Speaking with a Certified Financial Analyst Adetumi Atayero CFA, on the increasing rate of Inflation in the world, he attributed the high inflation globally to energy cost, supply chain and geopolitical tension.
He explained that, “the current Russian and Ukrainian war and the sanction on Russia by the west since their invasion of Ukraine has been a major factor contributing to the high cost of Energy in the world as Russia has retaliated by reducing the amount of oil production to Europe and other countries, knowing that Russia is the third Largest oil producing nation in the world after United States of America and Saudi Arabia”. Germany for instance depends solely on Russia for 40% of there gas supply and about 5 to 20% of oil supply, hence the reduction in the flow of oil to E.U has caused the price of oil to soar.
Nigeria on the other hand depends on Ukraine for their grains and some other staple foods, and since the onset the war there has been a reduction in the importation of wheat used for production of bread. This disruption means that wheat prices are now 25% higher than a year ago. Many other staples have become more expensive. A barrel of oil in Nigeria is selling at 105 dollars. Since oil is the major instrument for production of goods and services as energy affects all sectors of the economy leading to all round inflation.
The UN’s Food Prices Index has fallen for the fifth month in a row, and this is a sign that one of the main pressures pushing up the cost of living around the world could ease.The index fell to 138 points in August and is now lower than it was before Russia’s invasion of Ukraine. The countries were both major exporters of crops including sunflower oil, corn and wheat.
Undeniably, the COVID-19 pandemic imposed a sudden and dramatic shift on global supply chains as rolling lockdowns to mitigate the virus’s spread impacted the exchange of goods and materials on the world stage. Similarly, lockdowns on a national and local level led to a tremendous rise in unemployment, as businesses were forced to shutdown as a result of viral countermeasures.
This significant job loss forced the government to prop up the floundering economy via economic stimulus plans. These stimulus plans resulted in a large influx of money to the national economy, which in turn increased the currency supply and decreased its overall value. Adetumi however argued that “since the COVID-19 lockdown the supply chain around the world was greatly affected as it takes longer to import goods which has limited raw materials which inturn affects the cost of goods and services”.
Speaking on Geopolitical tension as one of the leading factors of high rise in inflation he said “China is responsible for a huge chunk of global production, the country currently is practicing zero COVID-19 tolerance which suggests that if one person contracts COVID-19 the economy would be shut down, which inturn affects production of goods” This means that if the ratio of demand is not proportionate to supply, it leads to high demand of goods which in turn leads to inflation.
Nigeria being an import dependent Nation. Increases in the prices of imported fuels, materials, and components increase domestic costs of production, and lead to increases in the prices of domestically produced goods. Imported inflation may be set off by foreign price increases, or by depreciation of a country’s exchange rate. Imported inflation which is evident in the devaluation of the Nigerian currency. Over the last 10 years which has seen the Naira erode in value at the cliff of 12% yearly against 2% average long-run inflation in U.S.A which leaves the difference at 10% depreciating value of the Naira against dollar.
The financial analyst also linked the devaluation of Naira to the poor economy management. “A country that spends about 86% of her revenue on debt servicing there is a tendency that people would see such economy as not being sustainable”, he said.
Recall that the World Bank had projected that the current inflationary pressure will push additional one million Nigerians into extreme poverty by the end of this year. In its latest Nigeria Development Update (NDU) report, titled, “The continuing urgency of business unusual,” it estimated that an additional one million would be added to the six million Nigerians that were already predicted to relapse into poverty this year because of increase in prices, particularly food prices.
Adetumi, speaking On how inflation affects the rich, argued that “the rich also take the beating on the effect of inflation but not as much as the poor and that since most of rich have companies in Nigeria and as well generates revenue in Naira that the inflation effect affects the generation of revenue in their various companies”. As at the time of this report Dangote’s networth stood at 12.7 Billion dollar ranking #130 on the Forbes list of world richest men compared to four years ago when the rate of dollar to naira was 150 naira his net worth was at 14 Billion dollars equivalent to 5.8trillion naira a decline of 1.3 Billion dollars.
Speaking on the way forward he pointed that the growth rate of the Nigerian economy is not proportionate to its Gross Domestic product (GDP)
“the idea of exporting our raw materials like cocoa and crude oil for it to be imported back as finished product is wasteful”.
The jobs which could have generated revenue for her citizen and as well save cost have been shifted to other countries, “our exports are now lower than our income”, added the Financial expert.
Increased insecurities in different parts of the country have also led to low productions of goods and services as the prices of the available goods are inflated to makeup for their efforts. “Government should focus on Infrastructural development and creating an enabling environment free of insecurities to enable investors and as well boost the economy while we improve in our technological advancement” Adetumi concluded.
Therefore, Nigerian government needs to employ the services of qualified economic managers to formulate and implement viable economic policies to drive the Nigerian economy on the path of growth and development.